Negative amortization is a situation where your mortgage payment is not enough to cover the interest due.
The interest then builds up and your total principal owing increases instead of shrinking.
Negative amortization can occur when you have a fixed-payment variable-rate mortgage and prime rate rises.
When considering a variable product you should always consider one that the payments fluctuate with prime, especially when it goes up. Many of the big banks and credit unions use negative amortization in their variable products. And say this is a good thing. To whom I must say?!
In my career I’ve seen many people, of course when prime is moving up (and yes it does happen), go from say a 20 year remaining amortization to 40 years remaining in a matter of a year or two. Again due to their ‘fixed’ payment on the variable.
Typically the Bank of Canada will only move by .25% which means a relatively small increase in payment on an average mortgage size.
The non bank lenders we have access to as independent mortgage brokers do not use this tactic in their mortgage product as it doesn’t make sense to you, the mortgage holder.